No Content Set


Insolvent trusts: the Z Trust cases

14 October 2022


The Jersey litigation involving the Z Trusts has generated a host of judgments which deal with some of the issues facing trustees of trusts who find that they are unable to pay liabilities out of trust assets as they fall due, or where the trust liabilities exceed the assets. This briefing aims to summarise the key legal points which have arisen since 2015.

There are numerous judgments of the Royal Court and one of each of the Court of Appeal and the Privy Council relating to the ongoing administration of a group of eight inter-connected family trusts, of which the ZII Trust and the ZIII Trust are insolvent.

Background facts

Equity Trust ("Equity"), as former trustee of the ZII Trust, became embroiled in English litigation for which it claimed indemnity from the trust.  Other unsecured creditor claims included loans made to the ZII Trust by family members (in the sum of £211m) and claims by Volaw for its professional fees incurred as successor trustee. As to assets, the ZII Trust had the benefit of a loan repayable by the connected (but also insolvent) ZIII Trust of significant book value (£186m) but uncertain actual value (estimated at £6m).

Volaw's claim became due and payable. Since it could not be paid from available assets, the ZII Trust was rendered cash flow insolvent. The cash flow position subsequently worsened upon compromise of the English proceedings by Equity in the sum of £18m (which it paid personally), leading to enforcement of Equity's indemnity. On a balance sheet basis, whilst the precise financial position of the ZII Trust was uncertain, its insolvency was never disputed.

As a result of the cash flow and balance sheet insolvency position of the ZII Trust, Volaw, the successor trustee, obtained directions and protection of the Royal Court on 29 April 2015. Volaw was subsequently replaced as trustee by Rawlinson & Hunter Trustees S.A. following a hearing on 20 October 2015. The matter came back to the Royal Court in March 2018 on the issue of the priorities of competing creditor claims.

Duties of trustees in insolvent situations

In the judgment dated 20 October 2015 the court held that when a trustee realises that the trust has become insolvent, or is probably insolvent, it must take action. Insolvency in this context should be determined on a cash-flow basis (as distinct from the balance sheet basis which applies when a deceased's estate is concerned).

As the beneficiaries are effectively "out of the money", the trustee must shift its attention to the interests of creditors and must obtain approval from either the creditors or (as in this case) the court for how it proposes to conduct the future administration of the trust. This shift towards the interests of creditors is analogous to company law and the administration of estates. The duties are owed to all creditors as a class and not to individual creditors or to a majority of creditors.

The court also noted, following previous authority in the context of insolvent estates, that the trustee's ability to charge remuneration based on the trust instrument is conditional on solvency. Upon insolvency, the trustee must obtain creditor agreement or court protection for the charging of ongoing fees. Failure to do so may mean that fees incurred beyond the point of insolvency might rank equal to, or perhaps even behind, the claims of other creditors.

What sort of insolvency regime should apply?

The court was presented with three options:

  • The trustee assuming the role of "liquidating trustee" under the supervision of the court.
  • The trustee appointing an insolvency practitioner to assist the trustee with the liquidation of the trust assets. He or she would, in particular, handle the creditor claims adjudication process as a result of the perceived conflict of a trustee conducting that task, since creditor claims are generally brought against the trustee personally.
  • The court appointing an independent insolvency practitioner in respect of each trust, reducing the trustee to a bare trustee, similar to the court's ability (rarely used) to appoint a receiver of a trust.

The court ordered the first option, leaving the trustees to conduct the winding up of the trusts under the supervision of the court, rather than appointing insolvency practitioners, principally in the interest of costs. Volaw was directed to administer the assets of the ZII Trust under the protection of the court on behalf of all creditors. However, the court also stated that the alleged conflict relevant to the second and third options was generally more perceived than real as a result of limited recourse provisions (statutory or contractual) which made the trustee in essence a cypher through whom claims are made.

As to the actual exercise to be undertaken, the court did not think a formal process modelled on the insolvent estate case of Re Hickman [2009] JRC 040 (itself modelled on the Bankruptcy (Désastre) Jersey Law 1990 and the Bankruptcy (Désastre) Rules 2006) was always appropriate and called for a flexible approach depending on the nature, number and type of creditor claims.

As Volaw had an ongoing role, it was granted priority for the payment of its fees for administering the assets of the ZII Trust from the date of the hearing onwards. The court held that should any creditor challenge any of Volaw's proposed steps then Volaw should seek court directions, and any creditor appearing might have to bear its own costs.

A similar regime was put in place in respect of the ZIII Trust. But in 2019, following a breakdown in the relationship between key parties and a renewed demand for repayment of the £186m loan by the trustee of the ZII Trust, the court was invited to re-consider who should handle the insolvency of the ZIII Trust and whether a formal procedure should be adopted.

In a judgment dated 26 April 2019, the Royal Court decided that whilst the winding up of the affairs of the ZIII Trust could continue to be conducted by its trustee acting as "liquidating trustee" and without requiring the appointment of an insolvency practitioner, a formal regime, modelled on that used in the Hickman case, should now be adopted "in order to ensure the fair treatment of creditors and to impose a timetable which should bring the matter to a conclusion without undue delay". The court noted that "there is no shortcut to the winding up being done properly". The precise directions imposed are appended to the court's judgment of 26 April 2019.

The equitable lien

In the judgment dated 12 February 2015 the Royal Court principally considered the position of Equity, which was concerned to ensure its ability to exercise its equitable lien over the assets held by Volaw as replacement trustee of the ZII Trust.  Equity cited the case of Investec Trust (Guernsey) Limited v Glenalla Properties Limited [41/2014] (29 October 2014, Guernsey CA) where the Guernsey Court of Appeal held that a trustee who has transacted has a right to be indemnified by out of, and up to the limit of, the trust assets held by a subsequent trustee. This right gives the former trustee a proprietary equitable charge over, or equitable interest in, the trust property held by the successor to the extent necessary to satisfy claims under section 32(1)(a) of the Trusts (Jersey) Law 1984.

The court made the following findings:

  • The Investec case on equitable liens applies in Jersey;
  • Equity has an equitable right and is entitled to ensure that the present trustees of the trust concerned do not take steps to ''destroy, diminish or jeopardise'' that right. The right extends to all of the assets of the trusts concerned;
  • Equity's equitable right extends to liabilities reasonably incurred in connection with the trusts concerned;
  • Equity's equitable right takes priority over the claims of beneficiaries.

Priority of various claims subject to the equitable liens

The judgment dated 3 July 2018 contains a detailed analysis of the priorities of various competing claims: (i) the priority between Equity's indemnity claims in respect of liabilities incurred in settling the English litigation and the other unsecured loan liabilities it incurred whilst trustee; (ii) the ranking of those claims alongside liabilities subsequently incurred by Volaw as successor trustee (and subject to Volaw's right to an indemnity).

The Royal Court held that all such liabilities are secured by equitable liens (secured at different times) in favour of each trustee.

The Royal Court held that all claims (whenever incurred) rank pari passu. The court held that Equity could not assert a lien in respect of the payments it had made in the English litigation ahead of its other loan creditors and ''scoop the pot''. Further, none of Equity's liabilities could rank ahead of later indemnification claims asserted by Volaw as successor trustee. Instead, Equity must share the estimated £6m available equally with all creditors.

Both judgments were appealed to the Court of Appeal in 2019. The Court of Appeal held that: (i) Equity Trust's personal liabilities incurred in settling the English litigation took priority over the claims of the other trust creditors with whom it transacted whilst trustee (ii) thereafter the various trust related liabilities which Equity Trust incurred with third parties ranked pari passu amongst themselves (iii) the liens securing all of these Equity liabilities ranked in priority to the equitable liens subsequently created in favour of the successor trustee. 

Appeals were made to the 7 member full board of the Privy Council and the hearing took place in June 2021. The case was conjoined with certain appeals from the Guernsey Court of Appeal in the Investec case (ITG Ltd and others (Respondents) v Fort Trustees Ltd and another (appellants).

The judgment of the Privy Council was delivered on 13 October 2022.  The Privy Council held as follows on the 4 issues which arose for consideration:

Question 1:  Does the right of indemnity confer on the trustee a proprietary interest in the trust assets? Answer: yes, unanimously.

Question 2:  Does the proprietary interest of a trustee survive the transfer of the trust assets to a replacement trustee?  Answer: yes, unanimously.

Question 3:  Does the former trustee’s proprietary interest in the trust property take priority over the claims of subsequent trustees under their rights of indemnity? Answer: No. All claims rank pari passu (by a majority of 4:3)

Question 4:  Does a trustee’s indemnity extend to the costs of proving its claim against the trust if the trust is ‘insolvent’? Answer: yes, unanimously.


Previously there has been precious little judicial guidance as to how trustees should conduct themselves where they become unable to pay the trust debts as they fall due or where the trust liabilities may exceed available assets.  Collectively, these decisions offer critical guidance for current trustees, former trustees with continuing liabilities, and creditors.

Trustees need to be particularly mindful as to whom they owe duties and will have a personal interest in ensuring that creditor agreement or court direction is obtained in order to ensure their remuneration continues to be recoverable.

Creditors, for their part, can be confident that their interests will take priority over those of beneficiaries, and this should prevent any distributions being made to beneficiaries to the detriment of creditors.

The most interesting and complicated aspect of these decisions is the split decision of the Privy Council on question 3.  Not only did Equity enjoy no priority to be reimbursed for the English litigation settlement proceeds over other third-party debts incurred whilst it was trustee, it gained no priority over the liabilities incurred by later trustees. 


If you would like any further information, please get in touch with your usual Bedell Cristin contact or one of the contacts listed.

No Content Set

Location: Jersey

Related Service: Insolvency & Restructuring